MICROSOFT: Okay, Fine, We Admit It--Apple Was Right*

Microsoft (MSFT) startled everyone yesterday by announcing that it is going to make and sell its own version of the iPad, which is called the "Surface."

This new tablet, which Microsoft CEO Steve Ballmer demo-ed in Los Angeles yesterday, will be made entirely by Microsoft--hardware and software.

This strategy, selling an integrated device, is a 180-degree turn from the strategy that Microsoft has employed with PCs and smartphones for the past three decades. The decision will certainly startle and possibly anger the hardware vendors that buy Microsoft's operating systems--Hewlett Packard (HPQ), Dell (DELL), etc.--all of which will likely have their own tablets. Now, instead of being a partner and supplier, Microsoft will be a direct competitor. That likely won't sit well.

So, why is Microsoft doing this? And does it have any chance of success?

Microsoft is doing this, I would argue, because it has realized that Apple (AAPL) is right: There are huge advantages to building and selling integrated devices, at least in the smartphone and tablet markets. (Microsoft's PC operating system business is still doing fine, although the world is rapidly moving into a "Post-PC" era in which the PC is much less relevant.)

In its latest attempt to recoup lost share in the smartphone market, Microsoft employed its standard strategy. It built a version of Windows for mobile, and then it partnered with hardware makers like Nokia (NOK). So far, this strategy has failed: Nokia is imploding, and the Microsoft-based smartphones have not been selling well.

Meanwhile, another big potential competitor in the tablet market, Google (GOOG), has failed to gain any traction with its own "software-only" strategy. With the exception of Amazon's (AMZN)Kindle, which is highly customized, Google Android-based tablets have flopped.

So Microsoft may have observed these two failures--its own in smartphones and Google's in tablets--and decided that the only way to compete was to make and sell the whole tablet itself.

Will it work?

That remains to be seen.

The "Surface" looked good in the demo, and it has some features that the iPad lacks--namely a "cover" that doubles as a keyboard. That feature will probably appeal to dedicated PC users who haven't yet made the jump to Apple. Apple's iPad is much more of a "consumption" device than a "creation" device, and the keyboard will make it easier to use Surface as a lightweight PC.

The Surface should also appeal to companies, which are struggling to support both Windows-based PCs and Apple-based iPads and iPhones. If the tablet works well, and runs native Microsoft Office programs well, companies may view it as the best tablet for them to use. And that will help Microsoft defend its turf in the enterprise.

But Microsoft has been in the hardware business before--with mixed results. The Xbox has worked: Microsoft attacked the game-console market and then displaced Sony and Nintendo. The Zune music player, however, was a disaster.

Importantly, Microsoft has also not said how much the Surface will cost or when it will be released. Microsoft is already two years behind Apple in tablets, and the low-end iPad price is already down to $399. If Microsoft can't beat that latter price, or can't launch very quickly, it's hard to see how the company will even have a chance.